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ELS session

    James Clois Rothwell
    Enron: An Extended Case Study
    ELS session posted July 28, 2010 by James Clois Rothwell, last edited May 2, 2012 
    1956 Views, 8 Comments
    Enron: An Extended Case Study
    names(s), affiliation(s):
    James C. Rothwell, Ouachita Baptist University
    August 3, 2010 4:00pm - 5:30pm
    Enron.pptx (92KB)



    • Robert E Jensen

      The WSJ is often my best source when I look for fraud reports and fraud warnings.

      Although Paul Williams likes to put down the Wall Street Journal, I like to give some credit where credit is due.
      The WSJ is making money at a time when most other newspapers are failing, and this allows the WSJ to afford some of the best reporters in the world, many of whom pride themselves on their independence and integrity.

      Here is an old example followed by a new example.

      Old Example
      A dogged WSJ reporter deserves credit for the the first public arrow that eventually brought down Enron's house of cards. If the WSJ was overly concerned about the welfare of the largest corporations in the U.S., this reporter or his employer would've buried this report.
      A WSJ reporter was the first to uncover Enron's secret "Related Party Transactions."  What reporter was this and what are those transactions that he/she investigated?
      Answer ---

      New Example
      "By pushing professional cards to consumers who otherwise wouldn't want them, card issuers can get around some of the provisions of the Card Act," says Josh Frank, a senior researcher at the Center for Responsible Lending, a consumer group.
      "Beware That New Credit-Card Offer," by Jessica Silver-Greenberg, The Wall Street Journal, August 28, 2010 --- 

      Amid all the junk mail pouring into your house in recent months, you might have noticed a solicitation or two for a "professional card," otherwise known as a small-business or corporate credit card.

      If so, watch out. While Capital One Financial Corp.'s World MasterCard, Citigroup Inc.'s Citibank CitiBusiness/AAdvantage Mastercard and the others might look like typical plastic, they are anything but.

      Professional cards aren't covered under the Credit Card Accountability and Responsibility and Disclosure Act of 2009, or Card Act for short. Among other things, the law prohibits issuers from controversial billing practices such as hair-trigger interest rate increases, shortened payment cycles and inactivity fees—but it doesn't apply to professional cards (see table).

      Until recently professional cards largely had been reserved for small-business owners or corporate executives. But since the Card Act was passed in March 2009, companies have been inundating ordinary consumers with applications. In the first quarter of 2010, issuers mailed out 47 million professional offers, a 256% increase from the same period last year, according to research firm Synovate.

      The Card Act's strictures have squeezed banks' profits and their ability to operate freely. By moving cardholders out of protected consumer cards and into professional cards, banks might recoup some of the revenue they have lost.

      "By pushing professional cards to consumers who otherwise wouldn't want them, card issuers can get around some of the provisions of the Card Act," says Josh Frank, a senior researcher at the Center for Responsible Lending, a consumer group.

      Several solicitations from J.P. Morgan Chase & Co. have ended up in the mailbox of John and Gloria Harrison, a retired military couple who live in Destrehan, La., outside New Orleans. Mrs. Harrison says she gets an offer for an Ink From Chase card, geared toward small businesses, almost every month. She says she finds this puzzling because her husband retired in 1986 and doesn't own a business.

      Bob Jensen's threads on The Dirty Secrets of Credit Card Companies ---

      Bob Jensen's Rotten to the Core threads ---

    • Robert E Jensen

      September 18, 2010 message from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

      I am about to give expert evidence in a civil matter in respect to the failure or otherwise of a company to maintain proper records. In this particular matter the accountant, or accountants to be more precise, cobbled together a final set of financial statements that were wholly self-serving for the directors of the company. This entailed significant convolution and, I would say, corruption of accounting. This has been done shamelessly and I think that applies literally. The accountant, I surmise, doesn’t know that accounting is not to be manipulated for self serving ends. The lawyer is searching the (English speaking) globe for precedent. This is proving difficult.

      Simultaneously I am involved in another matter, criminal in nature, about which I am legally constrained from giving detail. However I think I can say that the case has a disturbing element to it. Four insolvency practitioners and three government agencies have raked over the embers of this particular fiasco all the while bemoaning the lack of records. I became involved and asked if there were any general ledgers. There were. They had existed all the time and were set out in complete detail yet no-one bothered to look at them!

      In a third matter I am the liquidator of a company to which a bank had appointed a receiver months before. The receiver is a chartered accountant of good reputation. When I asked for the accounting records initially the receiver and his lawyer attempted to block me. After a good deal of battering with the legal powers that fall to me I was provided with the records and a confession that reconciliations had not been prepared nor a general ledger from the time of appointment. The receiver’s lawyer’s argument was that it was ‘convention’ to fail to maintain proper records. I did point out that it is impossible to control receivables, for instance, without a proper records including a GL but that is what they attempted to do. The burden of fixing the records falls to me and what a profound mess it is, involving bizarre goings on with respect to GST (the NZ name for value added tax).

      I am see many such instances as these.

      I said to the lawyer in the first matter, partially in jest, that I seemed to be the only person in insolvency that cared about accounting records. He replied, in all seriousness, that was probably true. I have thought about that since and I fear he is correct. I have begun to have a fear that I am truly alone, a voice crying into a void. Something, seen from my perspective, is very badly broken.

      Given that I am right I think about the causes. Leaving aside the general lawlessness that prevails amongst accountants due to their adversarial stance to the State’s tax collectors, I believe there are two causes: the manner in which accountants are trained and the fragmentation of accounting due to standard setting.

      NZ follows an American model in which people who are to become accountants are ‘educated’ in Universities. There is minimal emphasis on double entry. Most of the courses are dedicated to theory, bullshit sociology, complex management accounting, auditing and so on. None of this makes any sense to a student if they first do not know the basics of accounting and that can only be gained by actually practicing the discipline. Large numbers of accountants, to use the term loosely, are produced who do not understand that the centrality of accounting is double-entry and the prime record is the general ledger. In NZ accountants insist on calling themselves ‘chartered accountants and business advisers’ as they are ashamed on being accountants alone. This disease began about the same time as the Cogitor travesty was perpetrated.

      What has happened with standards, whilst well intentioned (the road to hell probably), has resulted in fragmentation of a discipline that should be approached holistically. As the complexity grows inexorably, practitioners are being left behind. Indeed the current chairman of the government body which approves standards has spent 20 years trying to ensure that standards only apply to big government and big business. He wants to exclude SMEs, being closely held companies, from the scope altogether. I understand why he wants to do this, but he suffers from an ahistorical perspective. When limited liability was developed in Britain, from where we get our basic law, the notion of ‘true & fair’ was developed to ensure creditors were protected. T&F has been found, in judicial precedent, to equate to standards. Yet 150 years later we seek to sever the connection.

      Standards are replete with vast tracts of turgid wording much of it petty in the extreme. It is unrelated to the basic mechanisms of accounting. It is a feat of learning and memory to cover the whole scope. Practitioners dealing with small companies have long since abandoned the attempt to acquire the knowledge. Even those operating large, publicly accountable entities do not attempt to master it. In consequence accounting has no fulcrum upon which it pivots. There is no centre. It has become fragmented.

      Words are no substitute for numbers. Having spent 20 years attempting to put standards at the centre I have had a Pauline style conversion. I now believe that all that is necessary is a set of principles – the conceptual framework will do for this purpose. It should then be left to the accountant to express these principles in the mechanics of accounting. Standard setters should be reduced to providing arithmetic examples, at a high level, detailing how this should be done. That is the reason why I prefer FASB to IASB. At least FASB works out how economic events operate arithmetically before it writes its turgid, prolix nonsense. But even then it does not show how its schemes work in double entry. I recall many years ago working with FAS 90 (I think) in regard to acquired mortgages. There are examples but not expressed in double entry. They are of limited use thereby.

      In America the problem is compounded due to the fact that the most important issue in accounting, solvency determination, is left entirely to lawyers and courts. The disintegration is complete. I truly believe I am staring at something too awful to contemplate. Accounting created, or helped to create, the modern economic world. Yet in its time of crisis it is hopelessly ill-equipped to respond because it has so profoundly lost its way.

      These may be the delusions of a solitary raving lunatic simply reflecting the psychology of the aging – being the prospect of doom. But then I might be right.

      Jensen Comment
      Some of what Walker asserts is also asserted in the following:
      "Open the Andersen archives to find way out of today's mess," by Michael H. Granof and Stephen A. Zeff,  Houston Chronicle, April 6, 2002 --- Click Here and interviews/HoustonChronicle--article with Zeff on Andersen.htm

      Bob Jensen's threads on Enron are at

      Bob Jensen's Enron Quiz is at



    • Robert E Jensen

      More Absurd Dictatorial and Counterproductive Behavior of Big Brother (read that the  Texas State Board of Public Accountancy)
      Courtesy of his former doctoral student Bill Kinney, Bob Jensen was contacted by Danny and was then briefly quoted in this one ---
      "Accountants, Texas board still at odds over Enron," by Danny Robbins, Bloomberg, December 24, 2010 --- 

      To many in the accounting world, Carl Bass is a hero. Long before Enron became a worldwide symbol of scandal, Bass told his supervisors at Arthur Andersen LLP that something was amiss with the Houston energy giant.

      But the Texas state board that licenses accountants sees Bass differently — as unfit to continue in his profession.

      Nearly a decade after Enron collapsed and took Arthur Andersen with it, the work of Bass and another former Andersen partner, Thomas Bauer, as Enron auditors is still being debated in a highly contentious and costly proceeding.

      The Texas State Board of Public Accountancy has stripped Bass and Bauer of their CPA licenses after determining they violated professional standards in their audits. But the pair has pushed back with a legal challenge that led a judge to rule that the license revocations should be voided because the board violated the Texas Open Meetings Act.

      The revocations remain in effect while the matter is under appeal, which could take at least a year.

      The upshot is a standoff playing out after most of the figures in the Enron scandal have had their days in court and raising questions about a little-known state agency that doesn't rely on the Legislature for funding.

      William Treacy, the board's executive director, said it's in the public interest for Bass and Bauer to be barred from working as CPAs. He cited the depth of the Enron scandal, which led to more than $60 million in lost company stock value and more than $2 billion in losses from employee pension plans.

      "There's a lot more than two licenses at stake," Treacy said. "Let's not forget the thousands of people who lost their life savings, their jobs and their pensions."

      The board argues that Bass and Bauer should have their licenses revoked because they failed to follow accepted accounting practices in conducting Enron audits in 1997 and 1998.

      But some observers believe the case is more one of overzealousness by the agency than insufficient audits.

      Wayne Shaw, a professor of corporate governance at SMU's Cox School of Business in Dallas, said it's unusual to see licenses revoked over flawed audits unless the accountants were complicit or showed total disregard for accepted procedures. That's particularly true for audits like those involved with Enron, he said.

      "I don't think people comprehend how complex Enron was, the mathematics behind some of these transactions," Shaw said.

      Some experts contacted by The Associated Press were stunned to learn that the state was taking such drastic action against Bass. Documents released by a U.S. House committee in 2002 showed that he challenged Enron's accounting practices as early as 1999 and was later removed from Andersen's Professional Standards Group because of complaints from Enron over his criticism.

      "Instead of punishing Carl Bass, he should be given a medal," said Bob Jensen, a former accounting professor at Trinity University in San Antonio.

      Jensen said the Texas accounting board has gained a reputation as "Big Brother."

      "What's happening (with Bass and Bauer) strikes me as absolutely absurd, but it doesn't surprise me," he said.

      The two former accountants, both of whom still live in the Houston area, declined interview requests through their attorneys.

      The state board voted to revoke the licenses in June 2008 even after a panel of administrative law judges recommended that the accountants merely be fined and admonished. But State District Judge Rhonda Hurley kept the issue alive in April when she agreed with Bass, Bauer and another plaintiff that the board engaged in a "charade of deliberation" when it went into executive session four times while considering the panel's recommendations.

      The board contends that it went into executive session only to discuss potential litigation with its attorney, a scenario that would make the meetings legal.

      Arthur Andersen, once one of the so-called "Big Five" accounting firms, was found guilty of obstructing justice in 2002 for the shredding of Enron-related documents. Although the conviction was reversed by the U.S. Supreme Court, the damage to the Chicago-based firm's reputation was enough to put it out of business.

      The document destruction occurred in the Houston office, where both Bass and Bauer worked, but neither one was involved.

      Records obtained by the AP show that the Texas board has spent $3.1 million over the last eight years to investigate and prosecute Bass, Bauer and five other former Andersen employees for their work on Enron audits related to the company's now-famous spinoffs with Star Wars-inspired names, Chewco and Jedi.

      Documents that came to light when Enron filed for bankruptcy showed Andersen auditors failed to uncover that the company was using the entities to hide its debt illegally.

      Bauer was barred from practicing before the Securities and Exchange Commission for three years because he didn't exercise due professional care despite "numerous red flags" associated with the transactions. Bass wasn't disciplined by the SEC.

      Treacy said the expenditures aren't out of line because the board is one of Texas' seven self-directed, semi-independent regulatory agencies. That means its funding comes strictly from fees, fines and other revenue it generates.

      "We're not subsidized by the state of Texas, and the (accounting) profession wants it that way," he said. "If we need to raise our license fees to prosecute cases, the profession supports us."

      Bob Jensen's threads on Enron are at


    • Robert E Jensen

      "If the Auditors Sign Off, Does That Make It Okay?" by Lawrence Weiss, Harvard Business Review Blog, May 1, 2012 --- Click Here

      Andrew Fastow, the former chief financial officer of Enron, recently completed a six-year prison sentence for his part in the scandalous deception that hid Enron's financial troubles from investors. After I was quoted late last year in an article on the 10th anniversary of the Enron debacle, Fastow contacted me and offered to speak to the Financial Statement Accounting class I teach at Tufts University's Fletcher School of Law and Diplomacy.

      Last month, Fastow made good on his offer. Why did he commit fraud? Why did a bright, aspiring, stereotypical MBA cross the line and misrepresent the true financial picture of Enron? According to Fastow, greed, insecurity, ego, and corporate culture all played a part. But the key was his proclivity to rationalize his actions through a narrow application of "the rules."

      Fastow's message, an important one for all managers and potential managers, has two key points. First, the rules provide managers with discretion to be misleading. Second, individuals are responsible for their actions and should not justify wrongful actions simply because attorneys, accountants, or corporate boards provide approval.

      After his guilty plea for fraud, Fastow forfeited $23.8 million in cash and property. He has helped the Enron Trust recover over $27 billion, of which $6 billion has gone to shareholders. (And he was not compensated for his presentation to my class.)

      He began the presentation by admitting he committed fraud and taking full responsibility for his actions. He made a heartfelt detailed apology and expressed remorse for having hurt so many people. He admitted making technical violations and taking wrongful actions that, while approved, were misleading. He said he knew what he was doing was wrong. But he rationalized those actions in his mind at the time, because the result was higher leverage, a higher return on equity, and a higher stock price. Further, he convinced himself that his actions were acceptable because they had been signed off by the firm's lawyers, accountants, and board and were disclosed in the financial reports. He told himself his actions were systemic, it is the way the game is played. All who cared to know knew. As Fastow rhetorically asked my students:

      "If the internal and external auditors and lawyers sign off on it, does that make it okay?"

      The problem is that attorneys, accountants, managers, boards, and bankers are not gatekeepers; rather, they are there to help businesses execute deals. They are enablers. In the case of Enron, these outside advisers played an active role in structuring and disclosing the deals, and the board approved them, but managers were still responsible for their own actions. Thus, technically following the rules as interpreted by these advisers, even if theirs is the best expertise money can buy, does not make a given action "right." Fastow emphasized that enablers are not an excuse: each individual is his or her own and only gatekeeper.

      Fastow suggested that to avoid falling into an ethical trap he should have asked himself the right questions: Am I only following the rules or am I following the principles? If this were a private partnership, would I do the same deal?

      Regulation has not prevented fraud. In fact, it may have exacerbated the problem. Enron viewed the complexity or ambiguity of rules as an opportunity to game the system.

      Compare Enron's deals with the structured finance innovations we've seen since the passage of the Sarbanes-Oxley Act: Enron's prepays (circular commodity sales which moved debt off the balance sheet and generated funds flow) look very similar to Lehman's Repo 105s (short-term loans secured with a transfer of securities treated as a sale of securities). The mispriced investments and derivatives at Enron look similar to mortgage-backed securities at banks or companies with a disproportionate amount of Level 3 fair-value assets (illiquid assets with highly subjective estimated values). Enron's $35 billion in off-balance sheet debt looks puny compared to the $1.1 trillion of off-balance sheet debt at Citi in 2007. Enron did not pay income taxes in four of its last five years, and GE pays little today. Banks are now engaging in "capital relief" deals that inflate regulatory capital in advance of the new Basel standards. Are these deals true risk transfers or are they cosmetic?

      Continued in article

      Bob Jensen's threads on the Enron and WorldCom frauds ---

      Bob Jensen's threads on auditing professionalism ---

    • Robert E Jensen

      "DEAL REACHED: Former Enron CEO Jeff Skilling Could Get Out Of Prison 10 Years Early," by Erin Fuchs, Business Insider,  May 8, 2013 ---

      Former Enron CEO Jeff Skilling has reached a deal with federal prosecutors to get out of prison a decade before his 24-year prison sentence is up.

      Under the deal Skilling — who was convicted of fraud for his role in the collapse of Enron — would get out of prison in 2017, the Justice Department announced. Skilling has agreed to forfeit more than $40 million and give up the right to appeal his conviction.

      A Justice Department spokesman said the deal ensures Skilling is "appropriately punished" and that Enron victims get restitution. A judge will have to sign off on the deal.

      Skilling has served six years of his sentence so far. In October 2006, Skilling got the 24-year sentence for his role in the massive accounting fraud that caused Enron's downfall.

      Continued in article

      Bob Jensen's threads on Enron's frauds, including a timeline of the major events ---


    • Robert E Jensen

      What he does not confess is how, before the scandal broke, virtually all employees of Enron who knew him hated the "arrogant little bastard"
      "The confessions of Andy Fastow," by Peter Elkind, Fortune, July 1, 2013 ---

      He was an improbable Las Vegas headliner, taking the stage before a packed convention hall of 2,500 fraud examiners.

      For former Enron CFO Andy Fastow, who spent more than five years in federal prison for his crimes, last week's appearance before the Association of Certified Fraud Examiners was his most public step in an uphill redemptive journey -- to explain how he became a "fraudster;" to sound provocative warnings about today's corporate practices; and even to offer a bit of revisionism on the company's 2001 collapse.

      Fastow launched his talk with a broad mea culpa, introduced with a grim joke. "Several of you have commented to me that your organization has grown dramatically over the past 10 years," he said. "And they thank me. They said no other individual has been more responsible for the growth of your industry than me. So: You're welcome."

      The crowd roared.

      "It's not something I'm proud of," he added soberly, after the laughter had died down.

      Fastow was initially charged with 78 counts of fraud, mostly connected to his central role in a web of off-balance sheet entities that did business with Enron, disguised the company's financial condition, and made Fastow tens of millions. He ultimately pled guilty to two counts, forfeited $30 million, and agreed to testify against his former bosses as a government witness.

      Since leaving prison in 2011 and resuming life with his wife Lea and two sons in Houston, where Enron was based, Fastow has kept a low profile. Now 51, he works 9-to-5 as a document-review clerk at the law firm that represented him in civil litigation.

      Fastow has given 14 unpaid talks, mostly at universities, usually with no press allowed. The first came at the University of Colorado-Boulder. He volunteered to speak to students after reading a column on ethics by the dean of the business school. Fastow has also spoken at Tufts, Tulane, and Dartmouth and is scheduled to address a United Nations group in the fall.

      In Las Vegas, dressed in a blazer and open shirt, Fastow stood at the podium a bit grim-faced, his speech sometimes halting. "I'm not used to giving talk to groups this big," he explained. "I apologize to you if I feel nervous -- if I appear nervous."

      "Why am I here?" he asked. "First of all, let me say I'm here because I'm guilty ... I caused immeasurable damage ... I can never repair that. But I try, by doing these presentations, especially by meeting with students or directors, to help them understand why I did the things I did, how I went down that path, and how they might think about things so they also don't make the mistakes I made."

      "The last reason I'm here," Fastow continued, "is because, in my opinion, the problem today is 10 times worse than when Enron had its implosion ... The things that Enron did, and that I did, are being done today, and in many cases they're being done in such a manner that makes me blush -- and I was the CFO of Enron." He cited the continuing widespread use of off-balance-sheet vehicles, as well as inflated financial assumptions embedded in corporate pension plans.

      MORE: Big companies don't have to lose their souls

      Fastow said he was prosecuted "for not technically complying with certain securities rules" -- but that wasn't "the important reason why I'm guilty." The "most egregious reason" for his culpability, he said, was that the transactions he spearheaded "intentionally created a false appearance of what Enron was -- it made Enron look healthy when it really wasn't."

      "Accounting rules and regulations and securities laws and regulation are vague," Fastow explained. "They're complex ... What I did at Enron and what we tended to do as a company [was] to view that complexity, that vagueness ... not as a problem, but as an opportunity." The only question was "do the rules allow it -- or do the rules allow an interpretation that will allow it?"

      Fastow insisted he got approval for every single deal -- from lawyers, accountants, management, and directors -- yet noted that Enron is still considered "the largest accounting fraud in history." He asked rhetorically, "How can it be that you get approvals ... and it's still fraud?"

      Because it was misleading, Fastow said -- and he knew it. "I knew it was wrong," he told the crowd. "I knew that what I was doing was misleading. But I didn't think it was illegal. I thought: That's how the game is played. You have a complex set of rules, and the objective is to use the rules to your advantage. And that was the mistake I made."

      After speaking for about 20 minutes, Fastow took questions. He insisted on this despite the trepidations of conference organizers. "A lot of people are still angry," explained James Ratley, a former Dallas police department fraud investigator and the Austin-based group's CEO. "I was cautious that someone would create a disturbance."

      The fraud group invites a "criminal speaker" to address its convention every year. But Fastow's invitation drew unusually acidic comments on a LinkedIn message board. "A total slap in the face to all of the honest and respectable investigators that could be utilized as a presenter," one person fulminated. "Just scum," was another's summary. "To be blunt," a third person wrote, "I see him as a calculating low life, as bad as an armed robber who would shoot up a bank to get the people's money."

      But Ratley dismissed the criticism. "If you're a fraud examiner and you don't want to deal with a fraud perpetrator, you ought to change professions." Ratley said he had met with Fastow to screen him "for any type of evasiveness. He has not dodged, ducked, or blinked since I started talking with him." ACFE made a point of noting prominently in promotional materials that Fastow was not paid to speak. (The group did cover his travel expenses).

      Among his questions, Fastow was asked about former Enron CEO Jeff Skilling's sentence reduction last month -- from 24 to 14 years. Fastow offered considerable sympathy for his former boss, against whom he had testified at trial. "Going to prison is terrible," Fastow said. "You're never comfortable. All the talk about 'Club Fed' is garbage ... You're surrounded by very violent people, very unstable people. Prisons work hard to make you uncomfortable. But that's not what's bad about going to prison. What's bad about going to prison is that you're separated from your family." (Skilling's parents and youngest son all died while he was behind bars.) Fastow added that even Skilling's reduced term is still "a devastating sentence."

      Fastow went on to insist that "Enron did not have to go bankrupt when it went bankrupt ... Enron should not have gone bankrupt. It could have survived. And it was decisions made in October 2001" -- after Skilling resigned as CEO -- "that caused it go into bankruptcy" early that December. That's a highly debatable point -- but Fastow did not elaborate.

      And then, the final question: "This is on a lot of people's minds. Many people vilify you for what you did at Enron, and the resulting effect on other companies, pensions, market share, people's fortunes. How do you grapple with that? How do you react to that condemnation?"

      "Um, well, first of all," said Fastow, looking down, "I deserve it. It's a very difficult thing to accept that about yourself. I didn't set out to commit a crime. I certainly didn't set out to hurt anyone. When I was working at Enron, you know, I was kind of a hero, because I helped the company make its numbers every quarter. And I thought I was doing a good thing. I thought I was smart. But I wasn't."

      "I wake up every morning, and I take out my prison ID card, which I have with me here today. And it makes certain that I remember all the people. I remember that I harmed so many people in what I did. It encourages me to try to do the little things that I can to make amends for what I did."

      "I can't repay everyone. I can't give them jobs. I can't fix it. But I just have to try bit by bit to do that. Being here is hopefully a little contribution to that."

      Continued in article

      MORE: The real story behind Jeff Skilling's big sentence reduction
      (Jensen:  Actually it was far less reduction than Skilling had hoped for --- he will remain in prison until 2017 while the creep Fastow milks the public speaking circuit)

      Bob Jensen's threads on the enormous Enron, Worldcom, and Andersen scandals ---


    • Robert E Jensen

      Perhaps the title of the article should instead be:
      "What Makes Rich and Powerful Executives (Continue to) Commit Fraud?"

      Jensen Comment
      Perhaps they became rich and famous because they committed fraud all along. The question is why they continue to commit fraud after they are multi-millionaires?  By all accounts most Ponzi scheme fraudsters eventually want to end their frauds but find that it's impossible to do so without getting caught.

      Frauds like inside traders that often involve partners who feed in the inside information make it hard to shut down such frauds unless all the partners agree to end the schemes.

      I don't think that behind the facade arrogance that most fraudsters do not daily live in tension and fear about getting caught. I think they continue to commit fraud either because they still need the money to feed their bad habits or that they cannot find an easy way out once they have their pot of gold.

      Of course there are many successful fraudsters who get out before its too late and live well on their stolen pot of gold.
      We often hear about the scores of Enron executives who grabbed their pot of gold early on and were never punished. I hesitate to call Rich Kinder a fraudster since I think he perhaps got out early when he commenced to smell the rats at Enron. He earned his billions legitimately after he left Enron without a pot of fraudulent gold.

      Some fraudsters get out due to blind luck. Read about Lou Pai's timely divorce below. Read about Rebecca Mack's timely firing that led to her very imely sale of her Enron stock.

      More questionable executives in Enron who departed early with their pot of gold ahead of law enforcement include Rebecca Mack and Lou Pai.

      Lou Pai
      First there's the soap opera of Lou Pai, his strip tease dancers, his Colorado ranch bigger than Rhode Island, and the mountain he named after himself.

      An obscure and incompetent trading executive named Lou Pai is the biggest Enron stock sale winner (over $270 million) but that was sheer luck because he was sued for divorce by his wife while Enron's share prices were still soaring.  Lou had an addiction for strippers to a point where he brought dancers back to Enron HQ to prove that he really was a wealthy executive.

      He didn't particularly want to sell his Enron stock at that time, but when he got a strip tease dancer pregnant Lou's wife demanded a cash settlement in the divorce.  That turned out to be the luckiest timing in her or his life.  I don't know how much the dancer got in the end, but she did marry Lou immediately after his divorce.

      Rebecca Mark's timely selling of her Enron shares yielded $82,536,737.  You can read 1997  good stuff about her in and bad stuff about her (with pictures) at

      Rebecca Mark-Jusbasche has held major leadership positions with one of the world's largest corporations.  She was chairman and CEO of Azurix from 1998 to 2000.  Prior to that time, she joined Enron Corp. in 1982, became executive vice president of Enron Power Corp. in 1986, chairman and CEO of Enron Development Corp. in 1991, chairman and CEO of Enron International in 1996 and vice chairman of Enron Corp. in 1998.  She was named to Fortune's "50 Most Powerful Women in American Business" in 1998 and 1999 and Independent Energy Executive of the Year in 1994.  She serves on a number of boards and is a member of the Young President's Organization.

      She is a graduate of Baylor University and Harvard University.  She is married and has two children.

      If Mark had taken a bitter pleasure in Skilling’s current woes—the congressional grilling, the mounting lawsuits, the inevitable criminal investigation—no one would have blamed her. And yet she was not altogether happy to be out of the game. Sure, she had sold her stock when it was still worth $56 million, and she still owns her ski house in Taos. Her battle with Skilling, however, had been a wild, exhilarating ride.

      Rebecca P. Mark-Jusbasche, now listed as a director, bagged nearly $80 million for her 1.4 million shares. Rebecca was just Rebecca P. Mark without the hyphenated flourish in 1995, though I shouldn't say "just" because she was also Enron's CEO at the time, busily trying to smooth huge wrinkles in the unraveling Dabhol power project outside Bombay. That deal, projected to run to $40 billion and said to be the biggest civilian deal ever written in India, hinged on a power purchase agreement between the Maharashtra State Electricity Board (MSEB) and Enron's Dabhol Power Corp. (a JV led with project manager Bechtel and generator supplier GE).

      There had been a lot of foot-dragging on the Indian side and Becky was there to light a fire. A memorandum of understanding between Enron and the MSEB had been signed in June '92 – only two weeks, as it happened, before the World Bank said it couldn't back the project because it would make for hugely expensive electricity and didn't make sense.

      According to the state chief minister's account given two years later, the phase-one $910 million 695 MW plant was to run on imported distillate oil till liquefied natural gas became available. By the time the phase-two $1.9 billion 1320 MW plant was to be commissioned, all electricity would be generated by burning LNG – a very sore point with World Bank and other critics, given the availability of much cheaper coal.

      In the event, by December '93, the power purchase agreement was signed, but with an escape clause for MSEB to jump clear of the second, much bigger plant.

      State and union governments in India came and went, and for every doubt that surfaced, two were assuaged long enough for Indian taxpayers to sink deeper into Enron's grip.

      Soon they were bound up in agreements to go ahead with the second phase of the project -- which now promised electricity rates that would be twice those levied by Tata Power and other suppliers. Unusually for this kind of project, the state government, with Delhi acting as a back-up guarantor, backed not just project loans but actually guaranteed paying the monthly power bill forever -- all in U.S. dollars – in the event the electricity board, DPC's sole customer, defaulted.

      "The deal with Enron involves payments guaranteed by MSEB, Govt. of Maharashtra and Govt. of India, which border on the ridiculous," noted on its Enron Saga pages. "The Republic of India has staked all its assets (including those abroad, save diplomatic and military) as surety for the payments due to Enron."

      Key Lay and Rebecca Mark attempted to strong arm President Bush and Vice President Cheney into holding back on U.S. Aid payments to India if India defaulted on payments to India for the almost-useless power plant built by Enron (because it was gas in coal-rich India).  However, about the same time, the Gulf War commenced.  The U.S. needed all the allies it could get, including India.  Hence, the best laid political strong arm intentions of Lay and Mark failed.

      Bob Jensen's Fraud Updates are at

    • Robert E Jensen

      Bloomberg:  Why They Did It: Madoff and Enron’s Fastow Explain the Biggest Frauds in U.S. History ---
      Jensen Comment
      When con artists explain why they committed fraud can you believe them?
      Con artists are so convincing even when they are lying?

      Some public sector frauds were bigger than these private sector frauds
      And some bigger frauds are joint public and private sector frauds (think Pentagon spending)

      Bob Jensen's threads on Fastow and Enron ---
      By the way Andy Fastow was only one of the many fraudsters among Enron's executives and not the only one to go to prison

      Bob Jensen's threads on Madoff ---